1. Field of the Invention
The present invention relates generally to pricing, costing, and tax systems, and more particularly to a system and method for calculating taxes and multi-currency pricing.
2. Description of the Related Art
Many tax systems calculate taxes for a financial or commercial transaction based on its components of goods and services. Goods and services may originate or travel through multiple tax jurisdictions that impose different tax treatments and tax obligations on the services or goods. Further, some goods and services may receive different tax treatments based on industry or the nature of the service. For example, foreign goods or services may be treated differently for tax purposes, and other services, such as health care services, may be tax-exempt in a particular jurisdiction.
A value-added tax (“VAT”) is an example of a tax that is imposed on goods and services that may receive different treatments based on the origin or the nature of the good or service. In the following detailed description, an exemplary VAT system illustrates a multi-jurisdictional tax system impacting goods and services that are part of a financial transaction. Other examples of a similarly complex tax system include a tax system on telecommunication activities crossing boundaries of multiple tax jurisdictions, a tax system involving multiple states or counties, and a tax system on foreign commerce.
The United Kingdom, Canada, New Zealand, and Australia are among those countries having a VAT system. In those countries, a VAT is applied to most commercial activities involving goods and services (e.g., production, wholesaling and retailing), and is generally assessed on the value added to goods and services at each stage in their production, distribution and sale. For example, a company within a chain of production and distribution is given input VAT credits for the goods it purchases from a supplier (“acquisition credits”). When the company later sells its goods to the next link in the chain, it is charged a VAT on the goods (“tax on supply”). The amount of VAT owed by the company to the government on each item sold is the difference between the tax on supply and the total acquisition credits of all the inputs that can be claimed by the company that are attributable to the item sold.
Some VAT jurisdictions exempt particular kinds of services and goods. For example, some tax jurisdictions exempt from their VAT foreign service inputs in a financial service transaction. The complexity in a VAT system gives rise to many approaches for tracking input tax credits. For example, the “cost allocation approach” tracks all the individual goods and services involved in each transaction. Such an approach, however, imposes a very expensive administrative burden on many companies. Consequently, most VAT jurisdictions allow companies to claim input tax credits using an alternative, simplified method, generally referred to as a “formula approach.” Under the formula approach, cost allocation for the purpose of calculating the VAT owed is approximated by a metric, such as a percentage of revenue or a percentage of net income. Government regulations, however, often limit the use of the formula approach to reduced credit acquisitions. As a result, the formula approach is financially unfavorable to the companies engaged in financial transactions because of the potential loss of otherwise available tax credits.
The cost allocation approach provides full and specific attribution of direct and indirect costs to transactions or activities, thus enabling the costs and the VAT paid to more accurately relate back to applicable specific transactions. As discussed above, while the cost allocation method provides a more accurate basis for treating VAT input tax credits than the formula approach, the cost allocation method's complexity incurs high administrative costs. The higher administrative costs are especially burdensome to smaller organizations engaged in transactions with mixed taxed and non-taxed inputs.
A further complication in some VAT calculations (also true of other multi-jurisdictional tax calculations, pricing or billing functions) is that the transactions may occur in more than one currency, or in a foreign currency. Transactions in different currencies complicate VAT calculations and pricing and billing decisions.